FOMC Comes Into Focus – Weekly Market Preview

This trading week looks set to focus on Wednesday’s FOMC statement, with some potential volatility around Tuesdays GBP CPI release and Thursday’s Bank of England MPC bank rate vote – both will be heavily scrutinized after central bank governor Mark Carney surprised the market last week by suggesting that interest rates were likely to rise sooner than the market expects.

The FOMC statement from the Federal Reserve is due on Wednesday. Expectations are for the Fed to continue reducing its asset purchase program by 10 Billion per month. A reduction by this amount should not surprise the market, as it is widely anticipated, however traders may take confirmation of the reduction to put on positions with more certainty. The Euro has not reacted with much short interest following the announcement of ECB easing measures, and a reduction in US stimulus may be enough to get the currency moving lower as the US dollar strengthens.

The Fed is not expected to try and surprise the market, as reductions are largely considered to be on auto-pilot for a late 2014 exit from Quantitative Easing. If the Fed were to shock traders, there would be considerable volatility. It is not clear which way they would be more likely to move, if they deviated from an October QE exit.

On one hand, US GDP growth and corporate profitability have taken a hit to start the year, so one could make the case for a more gradual reduction in stimulus measures to make sure the economy can stand on its own. On the other hand, stock markets and risk assets have continued to push higher – Fed officials have expressed some concern over creating new bubbles or instability through QE, so a case could be made to wind up the program sooner rather than later. As it is not clear which would be the best path, it is expected that the Fed would avoid either extreme and continue on its current path with a 10 Billion reduction.

British CPI data becomes more interesting when framed by Governor Carney’s words last week. The Pound has rallied strongly following Carney’s hints of future rate rises. A strong CPI print on Tuesday could see the rally continue in to the Thursday MPC meeting, which reveals members votes on changes to the policy rate. Analysts are not expecting any dissenting votes from the usual unanimous ‘Hold’, however this may be a case of buy the rumour, sell the fact.

Tuesday also sees the release of German ZEW economic sentiment, which is expected to improve slightly from 33.1 up to 35.2, as well as the release of US Core CPI, which is expected to increase 0.2% month on month – unchanged from last month’s increase. This data, like the GBP CPI data, will be important for affecting positioning and sentiment ahead of the FOMC statement.

Source: Forex Market Review – FOMC Focus

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